Unveiling the driving forces behind high non-performing loans in zombie enterprises: an executive-centric study

Abstract

Purpose

Excessive borrowing significantly contributes to pushing businesses towards default and their transition into zombie enterprises. Despite government efforts to implement deleveraging policies and guide bank credit flows, it’s essential to delve into the internal dynamics that steer the borrowing behavior of these zombie enterprises at a micro level. To gain a comprehensive understanding of the issue, this study focuses on examining the incentives that drive corporate executives of zombie enterprises to consistently engage in large-scale borrowing from banks.

Design/methodology/approach

In this study, panel data analysis is utilized, incorporating firm-, industry- and year-fixed effects. Drawing from data pertaining to listed companies in China spanning from 2007 to 2020, we employ a one-by-one identification method to pinpoint zombie enterprises. Ultimately, a total of 2,533 samples of zombie enterprises were obtained.

Findings

The results indicate that as bank loans to zombie enterprises increase, executive monetary compensation decreases, while on-the-job consumption by executives increases, and they are less likely to be forced into rotation. Mechanism testing reveals that corporate performance partially mediates the relationship between bank loans and executive monetary compensation, but this mediation is ineffective for on-the-job consumption and job rotation. Further investigation suggests that the property rights nature of central enterprises and modified audit opinions can exacerbate the adverse impact of bank loans on the monetary compensation of zombie corporate executives, without significantly affecting on-the-job consumption or job rotation. Conversely, executive power does not enhance the positive effects of bank loans on monetary compensation or on-the-job consumption, but it diminishes the negative impact of bank loans on the forced rotation of zombie executives.

Research limitations/implications

These results indicate that while bank loans may have a negative impact on corporate value, they function as safeguards for the positions and interests of executives. As a result, bank loans serve as incentives for executives of zombie enterprises.

Originality/value

This study holds theoretical significance as it explores the motivations behind non-performing loans in high-borrowing enterprises, sheds light on corporate governance challenges encountered by zombie enterprises and provides policy insights aimed at addressing the underlying causes of persistent non-performing loans in high-borrowing enterprises, including zombie enterprises.

Citation

Bai, M., Zhang, D. and Zhao, W. (2024), "Unveiling the driving forces behind high non-performing loans in zombie enterprises: an executive-centric study", International Journal of Managerial Finance, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJMF-09-2023-0434